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FX daily Commentary

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Is Dollar Comeback a Far Fetched Dream?

Tue, Sep 23 2008, 12:16 GMT
by Lena Manousarides

FXGreece

This week is certainly turning out to be full of action, with the EUR/USD moving more than 450 pips and the oil making a record breaking move of 26 dollars from $103 to $130!

The reason for these volatile moves was once again the negative market sentiment which has controlled everything in the last days, and the need for investors to exit their risky positions amid the market turmoil.

The EUR/USD broke important resistance levels in a violent move yesterday, after the 1.4450 London closing daily low shot all the way up to 1. 4860. This move was mainly due to negative dollar sentiment and thin liquidity, but also because traders are not sure anymore how the dollar will benefit from the economic meltdown of the last few weeks.

Today the economic calendar is devoid of important releases; however traders will closely monitor Bernanke and Paulson when they both testify in front of the Senate regarding the financial crisis, plus the Fannie Mae/Freddie Mac situation. Their words will be crucial for markets all across the board and if they signal the crisis worsening over the next months, the dollar will continue to dive against its counterparts.

The very fact the US government and the FED joined their powers this weekend in order to make a rescue plan for all those companies that suffer from the crisis, was initially interpreted by the market as good news, however come Monday and the good feeling was lost altogether along with stock market gains we saw recently. Market fear and uncertainty remains the name of the game and until we see stabilization in the economy, it won't change.

In the next few days we have Bernanke and Paulson’s joint testimony and also durable goods orders from US and GDP. Additionally, we have some news from the Housing sector which if it comes out negative again will only put further weight on the greenback.

The questions arising from all this is still the same: Will the dollar continue its recent comeback or return to the dog house once again? Is the move towards 1.49 for the EUR/USD just a simple correction of the big move down from 1.60 to 1.38, or will we see the pair climbing 1.50? All these questions will be answered in the coming days and as long as 1.50 stays untouched, we might see the pair moving from 1.45 to 1.50 until a break occurs. Don't forget that at 1.48 the pair is still in a consolidation mode since 1.4970 is the 50% Fibonacci level from its recent fall.

One argument that some analysts have is that all this negative sentiment which has been building over the last few days, with banks collapsing and economic data deteriorating, cannot be good for the dollar outlook and if economic conditions in US don't improve, EUR/USD can easily reverse if not all some of its losses towards 1.53.

Let’s see however how today’s first day of the testimony will go and what the two ’brave men’ will say to us all, but most importantly, how traders will interpret their words in relation to market moves.

Published on  Tue, Sep 23 2008, 12:17 GMT